The Best of the Integrated Oils

Whether its because of an unquenchable thirst from the developing world, or the West’s need for it as their economies rebound, oil demand is high. Cramer has wondered if there’s even enough to go around, creating the kind of supply and demand situation that leads to higher crude, and stock, prices.

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The question, though, is how to play it. Cramer already made the technical case for the oil-service sector’s top name, Schlumberger , and on Tuesday he endorsed ConocoPhillips , a major integrated oil.

Here’s why he likes COP: Like Marathon Oil , Conoco is restructuring to unlock value for investors. See, MRO last week announced it was split its upstream and downstream businesses—drilling and producing versus refining and gas stations, respectively—something the Street loved because the share price jumped 11 percent on the news. ConocoPhillips is doing much the same thing, and Cramer expects much the same reaction to the stock from investors.

In 2010, Conoco started selling off non-core assets, cutting its refinery spending and shifting that capital into finding and producing more oil and liquefied natural gas. Refinery spending should drop to 15 percent of overall capital employed from 27 percent in 2009, and the number could dip still lower if the company is able to sell its refining assets. At the same time, COP is selling of its stake in Lukoil, the largest oil company in Russia, bringing its stake down to 4.6 percent from 20 percent. And there’s smart cost cutting across the board here that’s tightening up the balance sheet as well.

Yes, Conoco has more exposure to the weak North American nat-gas market, but Cramer sees at least a partial recovery coming this year. Plus, the company is focusing more and more on oil with holdings in the Canadian Oil Sands and North America’s Eagle Ford, Bakken and North Barnett shales, as well as other liquids-rich areas. There’s even a shale play in China, thanks to a drilling partnership with PetroChina.

Much of this newly created money will go to shareholder-friendly buybacks and dividends, Cramer said. As for the stock itself, Jeffries said that if each of Conoco’s divisions was valued separately, COP would trade at $79, or about 16 percent higher than its current price. Hence Cramer’s big belief in this restructuring story.

What about the other integrateds, like Exxon Mobil or Chevron ? Stay away from the first, Cramer said. Exxon offers little growth, it bought nat-gas producer XTO Energy at the wrong time, and the company’s one bright spot is its downstream biz, which we now know isn’t where an oil bellwether wants to be. Chevron, though, is growing its production and offers more exposure to rising crude prices than any of its competitors. So CVX could work here, too.

Cramer’s recommendation for the integrated oils, then, is this:

“We like the ones that have, because they’re mature, the ability to unlock value a la Conoco or grow production and benefit from higher oil prices like Chevron,” he said. “And we don’t like the pitiful, helpless giant that is Exxon Mobil.”